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Bounce back in orders improves growth outlook

GMM Pfaudler 1QFY23 results were above estimates. Net sales recorded growth of 34% YoY (10% above JMFe), as international sales grew by 32% YoY, while standalone entity posted growth of 45% YoY. Consolidated EBITDA was up 19% YoY (35% above JMFe) with margins at 13.2% (+300bps QoQ), primarily led by better margins in international segment, even as standalone margins continued to remain suppressed. Order intake improved by 24% YoY, as the company booked 2 large orders in mixing (India) and evaporators (China). Order book stood at INR21.8bn (0.8x TTM sales), up 27% YoY. Management expects international order inflows to remain buoyant, due to build up in capacities in European markets in order to reduce dependence on China and India. In domestic markets, it is witnessing strong demand from chemicals on China+1 strategy and advent of PLI scheme, while pharma sector is expected to follow. Further, we expect foray into new businesses like interseal, acid recovery and separation systems (new acquisition – Hydro Air) to scale up in future. Maintain BUY with revised TP of INR1,900 (35x Sep’24E EPS), as we roll forward by 6 months.

* Strong execution on international and domestic front drives performance: Consolidated net sales posted growth of 34% YoY to INR 7.4bn. Glass-lined segment performed well across geographies and it had an order intake of INR1.9bn in domestic business in 1QFY23. On international front, company intends to enter new markets, but will also focus on reduction in costs through increased sourcing from low cost countries, which is likely to bring improve its geographical spread in Eastern Europe and Asia Pac regions.

* Margin improvement to be visible from 3Q23: Consolidated EBITDA was up 19% YoY (35% above JMFe) with margins at 13.2% (10.3% in 4Q22), as international operations continued to generate healthy margins, but impact of higher steel prices and change in product mix (high share of heavy engineering) led to lower margins in standalone entity. Management expect margins to improve going forward due to a) cooling off in raw material prices (steel and gas), b) new order inflows taken at better pricing levels and c) improvement in product mix as its being selective in HE segment orders.

* Asset light acquisition to foray into new segments: The company acquired Hydro Air Research Italia (HARI) , based in Milan, Italy, for a total consideration of EUR 4.96 mn (INR382mn), valuing the business at 0.6x CY21 sales. This would bring in adjacencies as it caters to similar set of customers in Germany and India in sectors such as plant based proteins, bio plastics and lithium purification. HAIR clocked a turnover of EUR8mn in CY21 with 11% EBITDA margins and has a backlog of EUR6.1mn (Jun’22). It was acquired for EUR4.96mn (0.6x sales) and will be funded through internal accruals

* Maintain BUY with revised TP of INR1,900: We continue to maintain buy rating on the stock and expect the company to post sales/EPS CAGR of 15%/24% over FY22-25E given a) robust order book growth to drive growth in core segments, b) foray into new segments like Interseal, Acid Recovery and Separation to accelerate growth. We maintain BUY with revised TP of INR 1,900, (35x Sep’24E EPS), as we roll forward by 6 months..

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